Investor resistance to Triple C risk crumbles

NEW YORK, Aug 19 (IFR) - Resistance is futile for some investors eyeing risky Triple C bonds as spreads and absolute returns continue to tighten across the board.

Throughout the year, investors have been wary of paper rated below Double B. But a global chase for yield across fixed-income assets is now starting to erode that reluctance.

The average yield on Triple C paper this week reached 13.83%, according to Bank of America Merrill Lynch data. That is still juicy compared with 4.49% on Double Bs, but is down from a peak of 21.68% reached on February 11.

And Triple C bonds have posted total returns of 25.09% so far this year, compared with 11.79% on Double B rated notes.

“There is a lot of cash coming into high-yield, but you still have asset managers that are a bit concerned about risk,” said one leveraged finance banker.

The reluctance to rush into bonds with such low ratings was partly driven by concerns over the outlook of the US economy and losses many funds suffered in their energy portfolios earlier this year as oil sold off.

As markets recovered, the mindset was still to avoid taking too much risk in a rally that many thought would remain fragile.

Issuance of bonds with Triple C ratings is currently running some 60% below last year’s level, according to UBS.

Supply, however, could gather pace as more Triple C rated borrowers are expected to hit the market with new deals in coming weeks to take advantage of a recovery in commodity prices and investors’ hunt for yield.

PIVOT TO TRIPLE C

“People are dipping into the Triple Cs again,” said a second banker, who argued that deals for companies in cyclical sectors or those perceived as turnaround stories would clear this market albeit at a “premium price”.

Bankers said the placement this week of a bond and loan package backing Apollo’s US$2.2bn takeover of timeshare operator Diamond Resorts, showed buyers were more amenable to Triple C risk.

The deal was first announced in late July but was delayed after an accounting mistake, announced during the marketing of the debt sale, forced the company to restate earnings for the past two years.

Faced with pushback from investors who demanded greater protection against early redemption, Diamond tweaked the structure of the financing twice, shifting US$500m from a term loan to a new seven-year non-call three secured bond.

The Triple C rated portion of the deal - a US$600m eight-year non-call three unsecured bond - was ultimately priced at a yield of 11%, at least 50bp wide to initial whispers, and traded down in the secondary market.

Though a struggle, the deal’s completion was seen by some as a sign that appetite for Triple C credits is growing. And bankers have already started working on a handful of other private equity deals.

These include the takeover of Thomson Reuters’ intellectual property and science business by Onex and Baring Asia, Advent International’s investment in inVentiv Health, and TPG Capital’s acquisition of broadband providers RCN and Grande. (Thomson Reuters is the parent company of IFR.)

All three deals are likely to include Triple C rated bond tranches and could come to market as soon as September, bankers told IFR.

“When they came into the Street for underwriting the sponsors got very good terms,” the second banker said of the deals in the pipeline. (Reporting by Davide Scigliuzzo; Editing by Shankar Ramakrishnan, Jack Doran and Matthew Davies)